Ladies and gentlemen, good day, and welcome to the Cholamandalam Financial Holdings Q3 FY 2024 earnings conference call, hosted by DAM Capital Advisors Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sanket Chheda from DAM Capital. Thank you, and over to you, sir.
Hello, everyone. Very good morning to all of you. We have with us the management team of Cholamandalam Financial Holdings to discuss their Q3 results. We have with us Mr. Sridharan Rangarajan, who is a non-executive director, Mr. Ganesh, who is the CFO, Mr. Suryanarayanan, who is MD Chola MS General Insurance, and Mr. S. Venugopalan, who is the CFO of Cholamandalam MS General Insurance. Without further ado, I would now hand over the call to management for their opening remarks. We'll follow that up with question and answers. Over to you, sir.
Yeah, thank you. Good afternoon to all of you, and thanks for participating in the call. Since you all follow Chola Financial Holdings call, which consists of predominantly the insurance side of the business being well covered here. Chola Finance is well covered, and you have a separate earnings call, which you have already attended. I request Mr. Suryanarayanan to give an overview, and then we'll go ahead with the FAQ.
Thanks, Sridhar. Good afternoon to each one of you for joining the earnings conference call of Chola Financial Holdings for Q3. We shall now proceed to give you a brief overview of the performance of Chola MS General Insurance for Q3. In the quarter, Chola MS recorded a gross direct premium of INR 1,855 crore with a growth rate of 14.2% as against the multi-line insurers' growth of 11.1%. The year-to-date December gross direct premium was at INR 5,525 crore with a growth rate of 25.8% as against the multi-line insurers' growth of 15.4%. The company has grown across all its channels.
In its captive channels, business from the sister company and the Insurance Express outlets grew by over 21% and growth of 27% from other channels, including crop. The addition of new channels has also helped attain this strong growth. As an update, in the month of January, Chola MS has renewed its bancassurance agreement with IndusInd Bank for a period of five years. The tie-up has been a long-standing bancassurance relationship for Chola MS since 2006. Chola MS also renewed its agreement with Union Bank of India for a further period of three years. A new tie-up has been signed with the Federal Bank as well.
Moving on to other aspects of operations, the expense of management for Chola MS was 33.3% in Q3, as against 36.2% in corresponding quarter of previous year, which means a reduction of 2.9%. The claims ratio for the quarter was at 74.5%, as against 69.7% in corresponding quarter. Q3 claims also includes the impact from the cyclone that hit the Chennai city and also the inundation in South Tamil Nadu. It also includes the claims provisioning for crop, which wasn't there in the previous period. The combined ratio for the quarter was at 110.3%, and excluding the effect of the cyclone and inundation, this placed at 108.55%.
Chola MS investment portfolio corpus, as at the end of December, was at INR 15,816 crores, with an investment income of INR 287 crores for the quarter. With no exposure to stressed assets, recoveries from the fully provided exposures will be recognized on cash basis as and when it happens. The profit before tax in Q3 was INR 134 crores, as against INR 58 crores in the corresponding quarter of the previous year. The year to date, the nine months ended profit before tax was at INR 353 crores, as against INR 156 crores in the corresponding period. More importantly, the return on equity for the nine months ended December has progressed to 15.23%. We are now happy to take any questions that you may have.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles … The first question is from the line of Swarnab Mukherjee from B&K Securities. Please go ahead.
Yeah. Hi, sir. Good afternoon, and thank you for the opportunity to ask the questions. I had three, four questions. So, first one, as you mentioned in the opening remarks regarding the crop provisioning that has been, you know, included in the claims number in this quarter. So I just wanted to understand, last quarter, I think the segmental numbers which you have provided, we had a loss ratio around 103 in crop, this time around 100. So, last quarter's number, is it fair to assume that that was the actual quantum of claims and no incremental provisioning was there, and it has largely been done in this quarter? If you could maybe give us some breakup of that, how to think about it going ahead, that would be very useful.
Also, if you could highlight on the nature of the crop tenders, you know, what kind of Excess of Loss kind of coverage you might have in your tenders that you could highlight. That is the first question on crop. Maybe after that, I will ask my remaining questions.
Yeah. Thanks, Swarnab. As was mentioned, last time around, Chola MS is operating the crop insurance in four districts of Maharashtra. We have a excess of loss reinsurance arrangements for loss ratios of excess of 100. So we are operating the 80%-110% program, and for loss ratios exceeding 100, we have the reinsurance protection. So the loss ratio that is reflected would more or less reflect the expected loss, plus the cost of the reinsurance program, is what is reflected there. So any specific things, Venu, if you can add?
Underlying loss ratio that we are assuming for crop has not changed, and maybe the effect on the allocation of the XOL cost. It affects the loss ratio. There is no fundamental change in the loss ratio that we are assuming between the previous quarter and the current quarter.
Okay, sir. Got it. In terms of the loss ratios that we are seeing in fire and engineering in this particular quarter, which looks elevated than the normal run rate. So, how much of this is due to the Nat Cats that you mentioned, and how much is coming, you know, organically, maybe because of, you know, price revision?
So we invite attention to page 54 of the presentation deck, where we have given you in the last footnote, which shows the impact of Nat Cat events in fire LR for Q3, which is largely the effect of the cyclone and the flooding. For us, was 36.6%. If overall loss ratio is reflected at 93.4, 93.4 - 36.6 is the effect of the normal fire loss for the quarter.
Right. Any impact on engineering also because of this? Because the engineering loss ratio is also elevated.
No, engineering is a very small book. There was one loss there, but it's a very small book as compared to the-
Fires are low. Even a single loss would trigger a higher loss ratio. That is not... You know, YTD, if you look at it, there is not much of an impact. The Q3 may be a single claim would have affected.
Understood.
It's a small book.
Understood. So now, coming to the motor part of the business, so I think, if I—I mean, for this quarter particularly, I think, if I were to remove the impact of crop in your overall growth, because it was not there, then our growth rate, what we are seeing it around 14%, would organically, you know, come down to a lower number in high season. I want, and, I mean, from the numbers, what I can make sense is that primarily because of the motor book. Now, I know your view on the two-wheeler side of the business, but on the CV side, we are seeing a degrowth also, and we are doing for the last couple of quarters.
Last three quarters, a run rate of around between 4-6. Is this where we should build the numbers going ahead? And, you know, some trends you can highlight, which is, you know, which is why you are maybe slightly more calibrated than where you were last year.
Yeah. So we have been more prudent and tight with respect to couple of aspects on the motor portfolio. This is the portfolio correction in terms of both payouts as well as discounts. Is something that we have been doing continuously, even from Q2, which is where, if you look at page 49, if you trace the growth of the motor line of business, for Q3, we are at about 4.8, as against the industry growth of about 10%. So evidently, here, we are punching below our weight very clearly because of the choices that we are making and the portfolio correction that we are giving effect to. Having said that, our portfolio continues to grow strongly in cars.
with the OEM and other tie-ups, and we are improving this. Commercial vehicles is also an area which is where we are seeing that is evident in page 56 of the deck where, as compared to last year, we are almost about 4.5 percentage points higher in terms of cars. And commercial vehicles, we haven't dropped much, so it's actually about 2.3, which in my view, by the end of the year, it should be more or less closer to about 44 or so. So, two-wheelers is something where while it may not dip further, but it would more or less stay at around these levels, at about 16.8-17 is what is there.
We believe that the corrections, the effect of corrections that we have been making, is showing up in the LR, which again, if you go back to page 54 and, the footnote three in that, presentation deck, you will see that the Motor OD LR, excluding the effect of the Nat Cat event, has come down now to about 69.4, which is, almost a 5.5% reduction from where we were in Q1, and, also almost about, over 3% from Q2 levels. So this, directional, journey towards a lower LR is becoming more prominent. So this, this is a matter that will continue, and will probably stay put around these levels.
Understood, sir. Anything you are seeing since you are growing strongly in the private cars, so what is the industry trend that you are seeing? Is there a normalization in terms of the competition levels?
See, I've always maintained that the competitive intensity has been high, and motor is a business that is highly competed in the industry. But one trend that we have seen is, in Q3, almost all the larger frontline players, you would have seen them growing at more or less at about 4.5%-5%. So the established players, four of the six large players, you will find that is more or less the growth in motor has been at that level. It is an effort from our side to prune down the loss ratios there and to make it more economically viable. So this is the step that many of the larger players are taking, and we believe that we are doing the right thing.
Got it, sir. One last one from my side. Your Banca channel growth has been slow. I just wanted to understand what products were getting sold there and, you know, any you know, should we expect this trend to remain?
Banca, showed that actually, see, the Banca, what we are mentioning is the PSU bank section there, which is there in page 60 of the presentation deck. I suppose it's what you are referring to.
Right.
So, here, yes, exactly, the growth has sort of tapered when you look at the corresponding nine months, especially with the PSU banks, where the property related discounts are at a greater play. But you will find that these volumes are still higher, but by end of the year, we do expect that things will improve to have a growth over the previous year.
Okay. So just to clarify, this is primarily due to the property side of the business?
Property side and the discounts are linked there.
Got it. Thank you so much. I'll come back in the queue for other, my follow-ups. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may please press star and one. The next question is from the line of Ravi Purohit from Securities Investment Management. Please go ahead.
Yeah, hi. Thanks for taking my question. Congratulations on a good set of numbers, sir. So there are three questions. One is, you know, if we look at our, you know, general insurance business between 2013 and 2019, our average ROEs for the business were above 19 or 18-odd %, right? With certain years, we are doing as much as 21, 22%. Subsequently, of course, there were some changes that we had to do because of IRDA not allowing expenditure, and how we were kind of, you know... plus, we had various other issues. Now, we are finally kind of inching back to around 13, 14% kind of ROEs. What is, in your view, long-term sustainable ROE that we aspire to, kind of, you know, as a company, achieve?
See, as I said in my opening remarks, as at nine months, we are reached to 15.23. Even at the beginning of the year, I had always said that it's quite possible to have anywhere upwards of 13.5. We have reached there. This is sustainable, and as we go along, even at without any change from any introduction of IFRS or any other external effect coming into play, moving it from the present level of about 15.3 to about 16.5 to 17 is very much possible.
... Okay. Okay, okay. And sir, if I may ask, where would those incremental, you know, 200 basis point improvement in ROE come from? Will it come from, let's say, higher yields on the CR investment book or lower combined ratio? Do you have, like, some, you know, medium-term target on combined ratio, which we are, like, working with? Because right now, we will kind of, of course, benefit from, you know, slightly higher yields on our investment book also. So it kind of takes care of, you know, higher, you know, combined ratios also. But either if you could just break it up for us over medium term, where exactly is the improvement, you know, emanating from?
See, given the fact that our investment-related multiples are high, whether it's in terms of the top line or in terms of networks, investment obviously will be a much stronger play because the company has also been deploying in higher yielding instruments, thanks to the interest rate cycle that we are in. And as the cycle changes, yes, there must be other opportunities as well for us be monetizing some gains. So certainly, investments will be a larger play which can help in pushing the ROE. But the challenge always is relating to the combined ratio. We've been having this climate change events impacting us. In fact, this year we have had one event in each of the quarters, which has impacted the industry in a larger way.
One does hope that we are saved from this impact, because even for the current year, the impact for us, Chola MS, for nine months is about 1.5% on the COR. So these kind of changes have been digested to give you this 15.3. If in a year we don't have such kind of changes, I'm sure the ROE can get even better.
Okay. Okay. And, sir, you know, on our, on our, you know, investment book, on the, on the debt side, can you share what's the duration of the, of the book now? If, let's say, we peaked out on our interest rate cycle, and if interest rates actually come off there, you know, better, longer duration will probably help. So I just wanted to understand if you kind of can share, you know, what's the duration of the investment book on the debt side.
Definitely we have been, you know, enhancing the tenure, whenever we talk about the fresh investments. Definitely with the interest rate being higher, it gives us an opportunity of a long-term higher yield. So currently, we have moved from the earlier region to that, you know, currently we are around 3.6. So the thing is, you know, we will continue to invest in the long term, so long as the interest rates are higher and reap the benefit of for the long term purpose.
Okay. Okay. And sir, two last questions. I think one is something that a lot of investors historically have always asked, in terms of, you know, from shareholder value creation point of view, whether Chola MS Insurance will kind of get listed or, you know, get monetized in some form or the other. So any update that you can share on that? Is it at all, like, being thought about or discussed about, sir, that would be helpful.
Yeah, no, thanks for asking this question. So our immediate aim as well as the long-term view is to build a very good general insurance franchise. We have been doing this consistently, and I think here is one franchise where it's been doing well since the day it started and it's been profitable. We have been growing consistently, and that's the single most aim we have at this point. The rest will follow based on, you know, how many things develop. Our focus is to build the business and build a good general insurance business that people would like to take.
Okay. Okay. And sir, one last question on Chola Holdings. It has two businesses. There is CIFC stake, there is MS Insurance stake, and there is a small called Chola Risk. Is holding the Chola Holding company itself planning to do anything else under its umbrella, or these will remain the two primary investments as of now?
No, I think it will. Whatever, allies, businesses relating, aiding these two investments is what is the primary objective of the holding company.
Okay. Okay, okay. Thank you and all the best, and I'll get back in the queue, please.
Thank you. The next question is from the line of Sanket Godha from Avendus Spark. Please go ahead.
Yeah, thank you for the opportunity. So, just wanted to understand this INR 100 crore of additional sub debt what we intend to raise, the likely impact of the same on the solvency margin. Today, we are at 179. How much is expected to improve with that number? And just trying to read between the lines, you can correct me if my reading is incorrect, that given our solvency was coming down with the previous growth, is it that conscious decision also played a role for our growth moderation in the third quarter compared to what we delivered in Q1? And now with the sub debt, we can expect growth trends to be relatively better than what we have delivered in third quarter.
As the previous participant highlighted, ex-crop, the growth looks muted, which was very strong, at least till first quarter and second quarter. Just wanted to understand this part, on growth, how you are looking at, and related to solvency. Yeah.
Yes. Thanks, Sanketh. Certainly, solvency has not been the worry or the decision point behind the growth aspect. INR 100 crore for Tier II inclusion will adjust it through the solvency about by 8-9 basis points. So to compare 1.78, push it up to about 1.87. So that is not that worrying element. Still there is headroom for growth.
Mm-hmm.
The solvency itself, part of the impact was due to the way we measure it, which is on a gross claims paid system, which is where the inundation and flood claims has had some effect, which will wear out as we move on to the next year. I don't think it'll again go down. So I don't think that's a long-term effect of, as long as we are profitable and, we are having a strong PAT, there is enough room for growth to sustain the growth. So certainly that is not behind the lower growth at a non-crop level. It is our portfolio correction and then consolidation before we make our next leap for growth.
Mm-hmm.
-being the prime driver. I'm sure you will see us growing stronger in the... And anyway, Q4 doesn't have much of crop as well, so you will find us growing.
Sure, sir. My second question is, if I look at your loss ratio, ex of CAT, ex of CAT, I mean, last year you were, in nine months you were at 111.4. Means if I exclude the CAT event impact in the current nine months, you are at 109. In the mix, you did little more crop, which was not there in the last year. Crop, as you highlighted, given there is no OpEx associated to it, and the combined might be closer to 102, 103, which is lower than the company average, at the combined level.
I just wanted to understand this delta improvement is largely crop-led, or you see this number to further improve, given the current corrective measures you have taken, probably with respect to motor or two-wheeler in that sense, or even health portfolio in PHU banks, if you have taken any?
Yeah. See, there is a combination of several factors. Motor is quite obvious. The portfolio correction, which is showing up in the ODLR improvement, even as a quarterly trend.
So that is quite obvious. The Expense of Management control, even adjusting for the crop element, has been quite strong.
Mm-hmm.
3.2% reduction, even adjusting for crop, is quite strong.
Mm.
So we consider this six months as a period of consolidation before we move to the next phase of growth. So that is how we are looking at things. And anyway, still we are not at a 30% EOM level. While we are doing well in terms of our board-approved plan that we have given to IRDA and are ahead of what we have given at this point in time, we still have the distance to travel to converge the 30 EOM by FY 2026, 2025, 2026.
Mm.
So I think so that correction will start reflecting continuously even on to the COR, which should be there.
Sir, I mean, if the focus on expense bringing closer to 30 in EOM levels, is it also partially playing the role in moderation in the growth? Because maybe we are rationalizing the payouts and that is getting reflected in the growth also. I mean, is it a chicken-egg problem kind of a thing, basically?
No, but that is the direction that we have to take in any case. So, it's also going about your business mix in a way which brings in and gives that leeway. You would notice that Chola MS still does very little of employer-employee group health.
Yeah.
To the extent that, we have, we have the lowest volumes in employer-employee group health in the industry. So, there are some clear strategic calls that the board makes on what to do at which point in time. So these will probably help us in taking us to the next rung of the race in terms of having the growth as well as the EOM. But fundamentally, we would look for businesses that are COR positive, even though the cost absorption initially could be high.
Got it, sir. So in simple words, if I want to put it in this way, given you have focus on EOM, and given you have focus on profitable portfolio, and you want to go back to the path of 16%, 17% ROE, then likely growth might be more of mid-teens going ahead, compared to 20+ what you delivered in the past. And that's the way I need to look at it, sir? Or you think you can still deliver 20% kind of a growth, given the kind of solvency also you have?
See, our, rather than locking ourselves into a percentage, I would tend to think that, we should grow at least at 1.4x of industry growth. 1.35x-1.4x, which we are running even at this point in time at, on an overall basis, which is there. So I think that will help us, give us, keep giving us the scale and which will help in better absorption of, the operating expense.
Got it, sir. So, if I ignore the CAT events, you already have improved your core by 2.5, 2-2.5 percentage points in nine months. Assuming CAT events don't repeat next year, most likely, the number you can expect to improve going ahead.
Second, related question: immediately in fourth quarter, given you have not reversed or your provisioning towards crop is very similar to what it was in second quarter, I mean, on ground, whether the experience is better than what you have provided, and can we expect a likely reversal to happen and therefore fourth quarter core to look better, given rains have been okay in Rabi and Kharif, relatively, in this part of the country, or Maharashtra region?
Generally, sir, there are no natural events that happen in the country in Q4. To that extent, I'm sure we will be saved of, that impact coming on to the P&L.
Mm-hmm.
Generally, going by history.
Got it.
Also, I think at this point in time, we will also look at how Rabi shapes before we really take a view on what to do, because the entire, the program and structure is based for one full, both Kharif and Rabi together. That is how we would want to take a view, rather than take a, a view on just one season. See, we do not want any huge fluctuations in what we report. So that is quite clear. So this is what underlines even the way we manage our motor third party loss reserving and provisioning.
Mm.
We would not have those, like, quarter-to-quarter upheaval, which we can see in some of the quarterly results. We would never have that.
Got it. Sir, my combination question was more from FY 2025, FY 2026 perspective, that 109 is the number what you delivered from nine. If it improved even by 100 basis point, no cat events for a full year, 108, like, slightly improved.
Sanket, let me put it this way: the board will certainly want me and Venu to deliver better results from the current year.
Okay, sir. Perfect. Perfect. And lastly, one data keeping question. Sorry, sir. Last one, data keeping question. Can you break down your health portfolio into benefit-based and indemnity?
Yeah. So, our, when health actually the benefits, indemnity benefits is, are not including the personal accident. Health alone would be, it would be about 55-45.
So 55 is benefit based, right, sir?
55 would be indemnity now.
Oh, okay. Okay, perfect, sir. That's it. Thank you very much.
Thank you. Ladies and gentlemen, to ask a question, you may please press star and one. Participants, to ask a question, you may press star and one. As we have no further questions, I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thanks, everyone, for joining the earnings call. At Chola MS, we believe that we are building a good, strong franchise, which emphasizes both the business growth as well as profitability. We have been doing well, and we expect to close the year as well on a high note. Thank you.
Thank you. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.